Hackett, Offshoring, Back Office, Savings

Hackett: Offshoring of back-office functions could generate billions in annual savings

Europe’s Top 500 companies could potentially save $58 billion annually, or almost $116 million on average per company, by offshoring many of their back office activities, according to research from The Hackett Group. Advances in technology, along with increasingly educated global work forces, enable the portability of business support activities across information technology (IT), finance, human resources (HR) and procurement to take advantage of labor arbitrage. Hackett estimates that the increased use of offshore resources may impact up to 1.3 million general and administrative (G&A) jobs, or on average 2,620 positions per company within the FT Europe 500.

According to Hackett’s research, globalization has created an environment where executives must constantly re-evaluate their cost structures for general & administrative (G&A) operations against a host of emerging global resources. Hackett also found that the best companies are strategically improving performance in Finance, IT, HR, procurement, working capital, and other areas in ways that help them respond to the pressures of globalization.

However many companies are relying on outdated sourcing analysis techniques that lead them to materially underestimate the benefit available through offshoring back office operations. With labor arbitrage savings approximating 62%, Hackett finds that executives must diligently standardize and simplify business processes to capture the potential value of activity centralization. Many organizations fail to examine the characteristics of business processes, allowing activities that provide no competitive advantage to remain decentralized in industrialized countries at a higher cost. Distributed activities are generally not portable, and therefore not included within the scope of a globalization initiative. The education base and skill sets available in India, China, The Philippines, Pakistan, Eastern Europe, Brazil, and other emerging countries continues to expand, offering a new level of savings combined with improved quality and talent, significantly strengthening the business case for globalization.

“Companies have long been aware that they can take out cost and improve back office efficiency by streamlining businesses processes, improving the way they use technology, and centralizing operations, either in a shared service centre or with an outsourcer. But over the past few years, the resources available offshore have matured rapidly, creating immediate opportunities to materially reduce companies’ cost structures,” said Hackett Vice President, Tom Bangemann.

According to Hackett Managing Director Michel Janssen, “Today, companies can turn to established offshore resources that deliver labor cost reductions while maintaining or even improving the skill level of staff. Most executives will miss the potential impact of service globalization due to the under-scoping of initiatives. Taking full advantage of service globalization requires a deep understanding of the nature of business processes and how they can be optimally organized and delivered.”

Having said this, companies still must use a well balanced assessment methodology that fully considers the business’ strategy, culture, transactional characteristics and readiness for change. By taking the broadest logical view of the processes in scope combined with a holistic evaluation methodology firms can ensure that they are maximizing the benefit opportunities available through global markets while managing the risk associated with these progressive transformation initiatives.

To see the full version of this research, please click on the following link for the Hackett Research Insight Center: www.thehackettgroup.com/insights/96M